Government contract changes permit government agencies to alter the terms and conditions existing in government contracts. This is allowed under what is called a “Changes clause” and can occur only when an agency’s contracting officer, who has the authority to make a directive change, issues a formal declaration specifying the nature of the change.

The Changes clause does not directly mention constructive changes. However, they are recognized as a way to overcome defective drawings or specifications that cause contractors employed under the terms of the initial contract to spend money and time performing what is later deemed unsatisfactory work under the terms of the existing government contract.

Here’s what happens:

  • The government unknowingly issues a contract that contains errors.
  • A contractor wins a bid for the error-containing contract.
  • The contractor then begins the work it was hired to do.
  • The government realizes the error but not before the contractor has spent funds and time working under the terms of the contract.
  • The agency’s contracting officer invokes the Changes clause to effect a directed change to amend the errors.
  • Although the term constructive change does not appear in the Changes clause, the contractor is able to recover money spent working under the bad contract as if the work was performed under the new directed change.
  • Therefore the contractor does not suffer losses because it was following faulty instructions.

Constructive Clause Recovery Procedures

When a contractor has been awarded and begun work under a contract that is later determined to contain errors, it is not necessary for the government to re-open the bidding process. Instead, the contractor who won the bid simply resumes work according to the directed changes issued by the contracting officer.

  • The adjustment is made to the final amount awarded in the contact to reflect the money already spent by the contractor and an estimate is made for the cost to fulfill the terms of directed changes.
  • If a dispute arises due to a disagreement on the amount of the adjusted cost, the contractor may present a case to the contracting officer for a further adjustment to the cost.
  • The contracting officer considers the contractor’s case and issues a formal decision.
  • If the contractor is still unhappy after the contracting officer issues the formal decision, the contractor may file a formal appeal with the director of the agency that issued the contract.
  • If the contractor agrees with the new costs, the constructive changes should be included in the final bill the contractor presents to the contracting officer upon completion of the project.

Constructive Changes Versus Breach of Contract

Case law has determined that once a final payment has been made for work on a contract that had a directed change, no further claims for costs under the theory of constructive changes can be made.

However, the Contract Disputes Act of 1978 gave the contracting officer broad authority to issue formal decisions regarding any issues that arise regarding the terms of a contract. As such, the constructive change was no longer a component of the Changes clause.

Thus, on the surface, it may appear that the government was guilty of a breach of contract for informally changing conditions of the issued contract. However, the change is not treated as if a breach to the contract has occurred because it has been established that the contractor is entitled to an equitable adjustment. That adjustment will be the difference between what were reasonable costs to perform the work before the directed change and the cost for performing the work after the change.

When the Change Clause Cannot Be Applied

The contracting officer cannot apply the Change clause indiscriminately. A recent case (CH2M-WG Idaho, LLC, CBCA 3876, Sept. 7, 2017) established that only limited changes can be made, and more generally that the terms and conditions of an existing government contract cannot be changed. This includes payment methods, warranties, and contract amounts.

In fact, the courts have determined that the only areas where the contracting officer may affect changes in a government contract is in the specifications provided for the work (including drawings and designs), the scope of work, the method of the work, materials used in the work, and directing acceleration of the work. The result of the changes in the costs for the contractor performing the work can only be determined by constructive changes.

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